Question

A recent accounting graduate from Lethbridge University evaluated the operating performance of Fane Company's three divisions. The following presentation was made to Fane’s Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $20,000, as shown in the analysis below.

                                       Other Two Divisions              Southern Division                  Total     

Sales                                       $1,000,000                           $300,000                     $1,300,000

Cost of Goods Sold                      650,000                           200,000                        850,000

Gross Profit                                  350,000                             100,000                          450,000

Operating Expenses                    100,000                           120,000                          220,000

Net Income                              $   250,000                           $ (20,000)                   $   230,000

Cost of goods sold is 80% variable and operating expenses are 70% variable. If the division is eliminated, 40% of the fixed costs will be eliminated.

Instructions

Do you concur with the new accountant's recommendation? Present a schedule to support your answer.

Answer 1

Differential analysis

	Continue	Eliminate	Net income increase (decrease)
Sales	300000	0	-300000
Variable cost of goods sold	-160000	0	160000
Variable operating expense	-84000	0	84000
Fixed cost	-76000	-45600	30400
Net income	-20000	-45600	-25600

So this division should not be eliminate because if this division eliminate net income would decrease by $25600